Islamic finance

Islamic banking and financial institutions grew along with political Islam: it declined, they did not. In fact, Islamic finance is now a confident part of the new global world of venture capital, ethical investment and profit-and-loss sharing.

The assets of Islamic financial institutions now top the $230bn mark. That is more than a 40-fold increase since 1982. Most of the large Western financial institutions, following the example of Citibank, have their own Islamic subsidiaries or, at the very least, Islamic “windows” or products aimed at their Islamic clientele. As proof of how many companies are compatible with Islamic law - and not just from within the Muslim world - there is now even a Dow Jones Islamic market index.

This may seem strange. We often hear it said that Islam is incompatible with the new world order that emerged with the end of the cold war. How can practices rooted in the Middle Ages thrive in the age of technology-driven global finance? Or institutions that are suspicious of interest operate within a global, interest-based financial system? And how can Islamic finance, often considered a facet of political Islam, experience its most rapid growth just as that same political Islam is on the wane ?

Modern Islamic finance began in the early 1970s at the intersection of two important developments in the Muslim world: the rise of pan-Islamism and the oil boom. The 1967 Six Day war marked the end of the secular pan-Arab Nasserite movement and the start of the regional dominance of Saudi Arabia under a pan-Islamic banner. With the start of the Organisation of the Islamic Countries movement (OIC) in 1970, the idea of updating traditional Islamic banking soon became part of the agenda. It was something that had preoccupied Islamic scholars, particularly in Pakistan, for a number of years.

Research institutes focusing on Islamic economics and finance began to spread throughout the Muslim world. In 1974 the OIC summit in Lahore voted, after oil prices quadrupled, to create the inter-governmental Islamic Development Bank (IDB). Based in Jedda, this became the cornerstone of a new banking system inspired by religious principles. In 1975 the Dubai Islamic Bank - the first (...)

(5) Until recently, the Christian and Judaic traditions had comparable misgivings about interest. See Rodney Wilson, Economics, Ethics and Religion: Jewish, Christian and Muslim Economic Thought, New York University Press, 1997.

(6) Zakat, or almsgiving, is of the five pillars of Islam. The others are the profession of faith, daily prayers, fasting during Ramadan, and for those who can afford it, a pilgrimage to Mecca.

(7) Roula Khalaf, “Dynamism is held back by state control: As family dynasties stifle creativity in most of the industry, the Islamic sector is showing signs of the greatest vibrancy”, Financial Times, 11 April 2000.